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Novartis: Analyst meet extracts

Aug 12, 2005

Novartis India recently had its analyst meet to discuss the future prospects of the sector and how the company hopes to benefit from the same. Here are the key extracts from the same.

What is the company’s business?

Novartis is a leading player in certain therapeutic segments, with strong brands like Voveron, Tegrital and Calcium Sandoz. The company has a strong presence in anti-TB, respiratory and anti inflammation segments. Also, it has a very strong parent back up which is dedicated towards research work and has consistently introduced new products in different therapeutic segments. However, it has a no manufacturing operations in India and all the products that Novartis sells are either out-sourced from the local producer or imported from the parent company. Thus, this company should be seen as a trading company rather than a drug manufacturing company.

Uncertainties related to the product patent regime: MNC pharma companies were uncomfortable launching patented products in India in the past citing India’s unfavourable patent laws (India recognised process patents and not product patents). The product patent regime came into force in India from January 1, 2005. This is a positive signal to the MNC pharma companies to launch patented products from their parent company’s portfolio in the Indian markets. However, according to Novartis, there are still certain ambiguities in the bill, which need to be cleared. Therefore, Novartis (like most of its peers Pfizer and Glaxo) plans to launch patented products in the country only after 2007.

Indian pharma market-growth drivers: Several factors are expected to boost the growth of the Indian pharma sector. GDP growth along with rising household consumption will be one of the factors driving growth. Similarly, increased penetration of health insurance in India (currently Indians pay for drugs from their own pocket) and the introduction of the product patent regime will be the other growth drivers.

Lifestyle changes: With the shift in demographics from the young to the aged, the incidence of chronic diseases (CVS, CNS, diabetes) is on the rise. Therefore, the chronic segment will be the main growth driver going forward and is expected to grow at a faster rate than the acute segment. Therefore, Indian pharma companies will have to realign their product portfolios accordingly.

Generics business: Novartis expects the anti-TB business to decline, as more and more business moves from the private sector to the government administered DOTS program. This program operates on lower margins and the company expects a negative impact of the same on the bottomline. Also, the price reduction imposed by the government on the company’s anti-TB products is likely to remain a cause for concern going forward. However, Novartis India is planning to counter the same by restructuring its field force to improve productivity and focus on increased promotional initiatives.

OTC segment: The announcement of a government policy for the OTC segment continues to be delayed. However, Novartis plans to introduce new variants of the calcium range in India. Also, the company will have to generate internal revenues to sustain its investment in brand building initiatives.

Animal health segment: The animal health business of Novartis has been on the decline in the past 2 years. This segment continues to be plagued by volatility in the poultry business. Competition arising out of cheaper imports and generics has also negatively impacted this business. In a bid to improve profitability, the company has chalked out plans of focusing on the relatively stable cattle segment and undertaking rural penetration programmes.

What to expect?

At Rs 580, the stock is currently trading at a price to earnings multiple of 12.5 times annualised 1QFY06 earnings. Going forward, the pharmaceutical and OTC businesses will be the main growth drivers. As far as the pharmaceutical segment is concerned, with the advent of the product patent law, the company is in a position to launch patented products from its parent company’s product stable. These new products along with a strong marketing and distribution network will help drive growth of this segment from a long term standpoint. As far as the OTC business is concerned, increased brand building and promotional activities will help this segment gain increased visibility for its products.

The company recently sold its ‘Rifampicin’ business, which is expected to increase the operational efficiency going forward. Initiatives taken to increase penetration in Tier 2 and Tier 3 markets (smaller towns) are likely to augur well for the company. However, till that time, Novartis will be seen as a trading company and will get a lower valuation compared to top MNC pharma companies like Glaxo and Aventis.

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